Price Elasticity of Gold

852 WordsFeb 22, 20134 Pages
Price Elasticity of Gold Group name: In-Demand The general inverse relationship between price and demand is a key fundamental in economics. A rise in price is known to shrink demand and vice versa. However, another important factor in economics is the price elasticity of demand, which can be interpreted as the percentage change in demand relative to the percentage change in price. Basic goods tend to be of low elasticity, thus the change in price has little effect on demand, while luxury goods are usually of high elasticity where demand varies greatly opposing a slight change in prices. In our analysis of the worldwide demand for gold over the past 3 years, the trend shows that a decrease in price leads to a decrease in the demand for…show more content…
For example; Q3 and Q4 of every year from 2008-2010 shows a higher demand rate despite an increase in price than when compared to the previous two quarters. In India, the wedding season starts from October and coincidently most festivals also fall during the same period. Hence the demand for gold shot up during this time of the year. Another interesting trend that can be observed from the above table is the dramatic increase in the elasticity of gold in Q4 of 2009. Following the recession in 2008-‘09, investors and the consumers started relying more on the gold as compared to other sources of investment such as stock and shares, which in turn pushed gold prices up. This led to an increase in the demand for gold and subsequently the higher price and for the first time in three years the price elasticity for gold touched the peak of 4.64. In conclusion, gold, being a luxury good has a positive price-demand relation and has a ‘greater than unitary elastic’ demand. References: http://goldandsilverblog.com/gold-and-silver-etf-holdings-decline-on-week-while-europes-debt-crisis-expands-0279/ http://www.gold.org/media/press_releases/archive/2011/02/global_gold_demand_in_2010_reached_a_10_year_high_in_tonnage_and_all_time_high_in_value/ http://www1.goldtrades.info/index.php/weekly-analysis/gold-price-forecasts http://www.munknee.com/2010/06/12180/ Paper submitted by: Arjun C Kishore Gautam Meghana Babu Nisha N Nair Saravanan

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